Banking on three solid quarters of 2014, the board of MasterCard Inc. (MA) announced incremental capital deployment plans, thereby augmenting shareholder return.
In an attempt to boost capital efficiencies, the company hiked its regular quarterly dividend by 45.5% to 16 cents per share from the prior payout of 11 cents. The raised dividend will be paid on Feb 9, 2015, to shareholders of record as on Jan 9.
The increased dividend brings the annual dividend to 64 cents from 44 cents paid in 2014. At the current price, the raised yearly dividend generates a dividend yield of 0.7%, up from the prior yield of 0.5%.
Alongside this hike, the board of MasterCard sanctioned a new share repurchase program worth $3.75 billion, higher than the $3.5 billion authorized in Dec 2013. Including $275 million from the last approval, currently the company has $4.025 billion worth of shares available for buybacks.
Solid Capital Deployment
In Dec 2013 as well, MasterCard had escalated its dividend payout by 83% along with a 10-for-1 stock split (initiated in Jan 2014) and the aforementioned share buyback expansion. Prior to this, the company had hiked its dividend by 100% both in Feb 2013 and 2012. Even earlier, MasterCard had amplified its dividend payout by 66.7% in 2007, after which no hikes were witnessed until 2012, therefore marking the fourth dividend hike since 2007.
Meanwhile, share repurchase authorizations of $2.0 billion and $1.5 billion were approved in Feb 2013 and Jun 2012, respectively. The quantity of share buybacks earlier rose to $2 billion in Apr 2011 from $1 billion sanctioned in Sep 2010.
Factors at Play
Armed with a strong liquidity and cash flows worth $2.7 billion at Sep 2014-end, we believe MasterCard is well positioned to implement the latest capital plans. Going forward, the improved outlook for card spending, cross-border volumes, gross dollar value (GDV) and payment volume generation given the recent strategic alliances, improving global economies and rapidly growing digital payments are likely to improve financials.
Notably, global card spending on credit and debit cards have witnessed at least high single-digit growth for most of 2014, also boosting cross-border volumes, which is a key revenue driver for card giants. Given the onset of the holiday season, we also expect improved transaction volumes and digital payments as shopping and travelling would be on cards for most global citizens.
Moreover, about seven acquisitions (one awaiting closure) in 2014 have further strengthened the company’s long-term inorganic growth profile, without risking the capital. These factors will likely maintain lucrative shareholder returns and retain market confidence.
However, following the announcement, shares of MasterCard closed at $87.69 yesterday, up 0.3%. The neutral market response indicates that the news flow was within expectations amid the regulatory and litigation challenges.
Peer Take
MasterCard’s magnitude of the latest dividend hike has been higher than bank-card network peers – Visa Inc. (V) and American Express Co. (AXP) (AmEx), which raised its dividend by about 20% and 13% in Oct and May 2014, respectively. Another banking and payment services giant, Discover Financial Services (DFS), had increased its dividends by 20% in Apr 2014.
These companies have been generously returning excess capital through share buybacks as well. In particular, AmEx distributed about 89% of its capital generated via dividends and share buybacks in third-quarter 2014.
Zacks Rank
Currently, MasterCard carries a Zacks Rank #3 (Hold).
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